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TMI Blog2019 (8) TMI 930X X X X Extracts X X X X X X X X Extracts X X X X ..... f comparables. E-Infochips Limited - No doubt Consultancy charges in relation to Software Development are part of Software Development, but the inclusion of ITES in the overall segment frustrates the comparability. We are currently dealing with the international transaction of `Provision of Software Development services and the international transaction of ITES by the assessee is a separate one which has also been benchmarked distinctly - e-Infochips Bangalore Ltd., having a pool of both software development and ITES segments into a common segment cannot be considered as comparable on entity level with the international transaction of `Software development of the assessee. We, therefore, order the exclusion of this company from the list of comparables. e-Zest Solutions Ltd - unlike Bodhtree, this company adopted a proper revenue recognition model by identifying income only on its earning and keeping the expenses as work in process to be taken over to the next year till the raising of the bill on the completion of the project. We, therefore, uphold the inclusion of this company in the list of comparables. Helios Matheson Information Technology Ltd - company is engaged i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose to consider other companies from the angle of comparability. We set aside the impugned order on the issue of transfer pricing addition in the international transactions of Rendering of software development services and Rendering of sales support services and remit the matter to the file of AO/TPO for the fresh determination of their ALPs in consonance with our above directions. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. Computation of deduction u/s.10A - reducing foreign currency expenses from export turnover (without excluding the same from the total turnover of the STP unit) - HELD THAT:- Since the amount of foreign currency expenses has been held by the AO himself as not forming part of `export turnover , the sequitur is that the same would also not form part of `total turnover , as there cannot be two different figures of `export turnover , one as an independent numerator in the formula and the other constituting part of total turnover in the denominator. To put it simply, foreign currency expenses which have been excluded by the AO from the ambit of `export turnover would also require exclusion fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht companies as comparable. The assessee worked out its own PLI at 10.76% as against that of comparables at average of 13.59% to show that the transaction was at ALP. The TPO made certain inclusions in or exclusions from the assessee s list of comparables and finalized his own set of comparables comprising of nine companies with adjusted average OP/TC at 26.47%. Applying the same as the arm s length margin, the TPO worked out transfer pricing adjustment of ₹ 25,32,54,961/-. The AO proposed this addition in the draft order. The assessee assailed various aspects of the ALP determination of this transaction before the Dispute Resolution Panel (DRP). Vide direction dated 05-09-2012, the DRP made certain adjustments to the list of comparables. Giving effect to the directions given by the DRP, the AO in his final assessment order dated 25-10-2012 computed the amount of transfer pricing addition in the international transaction of Rendering of Software Development services at ₹ 19,23,02,633/-, against which the assessee has come up in appeal before the Tribunal. 4. We have heard both the sides and gone through the relevant material on record. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be developed for the ultimate customers of BMC overseas entities, the assessee also sometimes directly liaises with the customers to understand their exact requirements. 6. We have also gone through the Software Development and Information Technology Enabled Services Agreement (Agreement) dated 01-09-2001 entered into between assessee and BMC Software Inc., USA, which was amended from time to time in the years 2002, 2003 and 2004. A copy of such Agreement has been placed on record. Definition clause in the Agreement defines Services to have the meaning as set forth in Appendix-A. Such an Appendix, in turn, lists various services to be performed by the assessee. Software Development services have been primarily shown at point (a) - Production of Computer Software by way of architecturing, engineering, design, development, testing and support of software; and partly at point (b) concerning support services to the above. Clause II of the Agreement provides that: `To enable BMC India to render Services, BMC shall grant a non-exclusive and personal license to BMC India to use any and all intellectual property owned by BMC that ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny in the final list of comparables. 8.2. We find from the Annual report of this company that it: has only one segment, namely, Software development. Being a software solutions company, which is engaged in providing open and end-to-end web solutions, software consultancy, design and development of solutions, using the latest technologies. Thus, it can be seen that this company is providing end-to-end solutions and also consultancy, which is not the case with the assessee company. 8.3. The ld. AR submitted that Bodhtree Consulting Ltd. cannot be considered as comparable because of a different model of revenue recognition. He invited our attention towards the Annual report of this company, in which it has been specifically reported under the head Revenue recognition , that: Revenue from software development is recognized based on software developed and billed to clients. The ld. AR submitted that the costs incurred by this company in respect of the projects pending completion at the end of the year are booked at the time of incurring, but, the income is recognized on the raising of bills, thereby distorting the figure of operating profit for a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion are excluded from the Trading and Profit loss account by taking them to Balance sheet. To illustrate, if there is an incomplete contract worth ₹ 100 for doing a particular work, and the assessee has incurred ₹ 60 on this project till the close of the year, but the income is to be recognized only on the completion of the project, an event to take place in the subsequent year, then, the amount of ₹ 60 is not considered as expenditure for the year, but is taken to the Balance sheet as closing work-in-progress, which becomes opening work-in-progress for the subsequent year and the income is finally computed from such project/contract in the next year on the raising of bill of ₹ 100/- after allowing deduction for the expenses incurred in the earlier year at ₹ 60 and the further expenses incurred in the year of raising of the bill. In this way, profit for the earlier year in which expenses of ₹ 60 were incurred and the next year in which bill is raised for ₹ 100 on completing the work, gives true and fair view of the profitability of that enterprise for both the years. If an enterprise, instead of capitalizing ₹ 60 in the first year, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I.T. enabled services which is considered the only reportable business segment . This indicates that the revenues from Software Development and ITES have been clubbed by this company which also includes Consultancy charges. No doubt Consultancy charges in relation to Software Development are part of Software Development, but the inclusion of ITES in the overall segment frustrates the comparability. We are currently dealing with the international transaction of `Provision of Software Development services and the international transaction of ITES by the assessee is a separate one which has also been benchmarked distinctly. In our considered opinion, e-Infochips Bangalore Ltd., having a pool of both software development and ITES segments into a common segment cannot be considered as comparable on entity level with the international transaction of `Software development of the assessee. We, therefore, order the exclusion of this company from the list of comparables. (iii) e-Zest Solutions Ltd. : 10.1. This comparable was proposed for inclusion by the TPO in his final set of comparables. The assessee objected to this move on the bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 019/-. The elaboration of such revenue from operations has been given in Schedule l as Income from software sales and services at ₹ 2,13,37,41,527/- in addition to Other income and Dividend income. Segmental reporting has been discussed at page 66 of the Annual report to indicate that The company is operating in a single segment . It, therefore, transpires that the income of this company is not only from software services but also from software sales. This shows that the company is engaged into the business of software products as well. There is hardly any need to state difference between the software product company and a software development company. Whereas a software product company would develop a product and then earn revenue from its sale over a period, a simplicitor software development company would render software development services not leading to creation of any software product in its hands and earn revenue from such rendition of services only. The assessee is only a software development service provider, though such service may lead to creation of some product but the same is meant for its AE and not the assessee . Au contraire , Helios and Matheson is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding Software Development Services but is also dealing in Software products under the relevant segment. As the assessee is not engaged in the business of Software products but is rendering only Software services on captive basis, in our considered opinion, this company cannot be considered as comparable. The Hon ble jurisdictional High Court in CIT vs. PTC Software (I) Pvt. Ltd. (2017) 395 ITR 0176 (Bom) has held that a Software product company cannot be compared with a company providing software services. As Kals Information Technology Systems Ltd. is engaged in selling of software products which is different from the activities undertaken by assessee, namely, rendering of software service only to its AEs, we hold the same to be incomparable and accordingly direct to exclude it from the final list of comparables. (vi) Maars Software International Ltd.: 13.1. In addition to the assessee seeking exclusion of the above five companies, a prayer has also been made for inclusion of Maars Software International Ltd. , which was excluded by the TPO on the ground that it was predominantly an on-site service provider having different features vis-a-vis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through the relevant material on record, we find that similar issue came up for consideration before the Tribunal in assessee s own case for the A.Y. 2006-07. In para 44 of its order, the Tribunal has restored the matter to the file of AO/TPO for computing the risk adjustment after granting reasonable opportunity of hearing to the assessee. In the absence of any distinguishing feature having been brought to our notice by the ld. DR, respectfully following the precedent, we-set aside the impugned order on this score and remit the matter to the file of AO/TPO to follow the directions given by the Tribunal in its order for the A.Y. 2006-07. II. SALES SUPPORT SERVICES SEGMENT 16. The assessee declared an international transaction of Rendering of sales support services with transacted value of ₹ 2,47,84,351/- The assessee applied the TNMM as the most appropriate method for its benchmarking. Computing its own OP/TC at 8.84%, the assessee worked out average adjusted margin of comparables at 15.24% to demonstrate that its transaction was at ALP. As against the assessee choosing seven companies as comparables, the TPO expanded the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Honeywell Turbo Technologies (India) Pvt. Ltd. Vs. DCIT for the A.Y. 2008-09 (ITA No.2584/PUN/2012 dated 10-02-2017), a copy of which has been placed on record. The ld. AR invited our attention towards para 24 of the later order accepting change in profile of this company in comparison to earlier years and accordingly holding it to be not includible in the list of comparables. It was, therefore, prayed that the changed business profile of TSR Darashaw be considered, which is relevant for the year and it should be removed from the list of comparables following the decision of the co-ordinate bench in the case of Honeywell Turbo Technologies (India) Pvt. Ltd. (supra). The ld. DR did not dispute the position as put forth on behalf of the assessee. 18.3. We have heard both the sides and gone through the relevant material on record. We have also gone through the Annual report of this company for the year under consideration, a copy of which has been placed on record. On perusal of such Annual Report, it emerges that this company on an overview is a broking and investment banking house. Apart from Pay Roll and Trust Fund activity (Pay Roll), its other segme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g effect to the amount of `total turnover . Formula for computation of deduction has been set out in sub-section (4) of section 10A providing that computation of the amount of profits derived from export of the eligible products shall be done by considering the same proportion as export turnover in respect of such products bears to the total turnover to the profits of the business of the undertaking. There are three components involved in the computation of eligible profits. Apart from the profits of the business of the undertaking, there is a one component of export turnover and another of total turnover. The term export turnover has been defined in Explanation 2(iv) to section 10A as consideration in respect of export of articles or things etc. received or brought into in India but does not include freight, telecommunication charges or insurance attributable to the delivery of articles or things etc. outside India incurred in foreign exchange in providing the technical services outside India. The term total turnover has not been specifically defined in the definition clause of section 10A contained in Explanation 2. However, it goes without saying that `total turnover compri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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